SC upholds arbitration award on ONGC-Sumitomo row

The Supreme Court has upheld an arbitration award in a dispute between Oil & Natural Gas Corporation (ONGC) and Sumitomo Heavy Industries over income tax liability, directing the state-run firm to pay 129.6 million yen to the Japanese firm.

A Supreme Court bench comprising justices RV Raveendran and HL Gokhale set aside an order of the Bombay High Court, which had in December 2001 turned down the arbitration award directing ONGC to reimburse the tax liability for a project on one of its Bombay High offshore site.

"We allow the appeal and set aside the judgment of the single judge, as well as that of the division bench (of the Bombay High Court). The award made by the umpire is upheld and there shall be a decree in terms of the award. The arbitration petition filed by the respondent (ONGC) for setting aside the award shall stand dismissed with cost," the bench said.
    
ONGC had, in July 1982, invited global bids for installing and commissioning a well-cum-production platform deck to extract oil from its Bombay High offshore site.
    
The project, valued at 108 billion yen, was awarded to Sumitomo Heavy Industries. The Japanese company was also given the responsibility of laying submarine pipelines to connect the rig with the ONGC system.
     
At the time of the award, the transaction was totally exempted from income tax, as the fiscal limit of the then I-T laws was applicable only to an extent of 12 nautical miles in the territorial waters of India.
   
Later, the Japanese firm issued a sub-contract to McDermott International Inc on December 1983. The project was completed and a discharge certificate was issued by ONGC in May 1984.
    
Meanwhile, the government amended the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act of 1976, and extended the limit of income tax to all continental shelves with effect from April 1, 1983, which made it mandatory on ONGC to deduct tax at source.
    
Following it, the I-T department served a notice to McDermott, directing it to pay tax for 1983 and 1984. It was asked to pay Rs 1.8 crore, and the company obliged. Later, McDermott claimed it from Sumitomo, which in turn sought reimbursement from ONGC. However, the PSU rejected the demand.
    
Following this, the dispute went for arbitration. The panel, in 1994, had given its award in favour of Sumitomo and directed ONGC to pay the amount to the Japanese company with 4.5 per cent interest. ONGC challenged the arbitration award in the Bombay High Court, which passed verdict against the arbitration award.
    
However, the apex court turned down the High Court order and upheld the arbitration award, stating that under the Arbitration Act of 1940, it cannot be challenged in any court.